Question 1

In a perfectly competitive market, what condition must be met for a firm to decide to shut down production in the short run?

Accepted Answer

If price is less than average variable cost ($$P \u003c AVC)$$

Question 2

Suppose Farmer Brown’s average variable cost of blueberries is $$12 per crate and average total cost is 15 $$per crate. If the market price is $14 per crate, what should Farmer Brown do in the short run?

Accepted Answer

Continue producing because price is greater than average variable cost

Question 3

Which curve represents the supply curve for a perfectly competitive firm in the short run?

Accepted Answer

The marginal cost curve above AVC

Question 4

If a firm in a perfectly competitive market is earning an economic profit, what will happen in the long run?

Accepted Answer

New firms will enter the market, driving the price down

Question 5

In the long-run equilibrium of a perfectly competitive market, what is true about the relationship between price, marginal cost, and average total cost?

Accepted Answer

Price equals marginal cost and average total cost ($$P = MC = ATC)$$

Question 6

A firm’s fixed costs are $$50. If the market price is 20 $$per unit and the firm’s average variable cost is $18 per unit, what is the firm’s short-run decision?

Accepted Answer

Produce because price is greater than average variable cost

Question 7

If the price of cage-free eggs rises and farmers earn economic profits, what is the most likely outcome in the long run?

Accepted Answer

More farmers will enter the market, increasing supply and reducing price

Question 8

Which area on the cost curve graph represents a firm’s loss when price is below average total cost but above average variable cost?

Accepted Answer

Area between average total cost and price

Question 9

If a firm’s total revenue is less than its variable cost, what is the correct shutdown rule?

Accepted Answer

Shut down because total revenue does not cover variable cost

Question 10

In a perfectly competitive market, what happens to the equilibrium price when firms exit due to economic losses?

Accepted Answer

The equilibrium price rises

Question 11

Which of the following best describes the long-run supply curve in a perfectly competitive market?

Accepted Answer

It is horizontal at the minimum point of the long-run average cost curve

Question 12

If the market price for blueberries falls below the minimum point of the average variable cost curve, what should Farmer Brown do?

Accepted Answer

Shut down production in the short run

Question 13

A firm in a perfectly competitive market faces a price of $$10 per unit. Its marginal cost at the profit-maximizing output is also 10. $$What does this imply?

Accepted Answer

The firm is maximizing profit by producing where $$MC = P$$

Question 14

Which of the following is NOT a characteristic of a perfectly competitive market?

Accepted Answer

There are barriers to entry

Question 15

If the price of eggs is $$5 per dozen and the average total cost is 3 $$per dozen, what is the economic profit per dozen?

Accepted Answer

Economic profit is $$2 per dozen (5$$ - $$3)$$

Question 16

In the context of cage-free eggs, what economic principle explains why profits did not remain high for farmers who first adopted cage-free methods?

Accepted Answer

Entry of new farmers increased supply, reducing price and profits

Question 17

If a firm’s average total cost is minimized at $$Q^*$$, what will be the market price in the long-run equilibrium?

Accepted Answer

Market price will be equal to $$ATC at$$ $$Q^*$$

Question 18

Which formula correctly expresses the shutdown rule for a perfectly competitive firm?

Accepted Answer

$$P \u003c AVC$$

Question 19

If a firm’s marginal cost curve intersects its average variable cost curve at $$Q_{min}$$, what does $$Q_{min}$$ represent?

Accepted Answer

The shutdown point

Question 20

In a perfectly competitive market, what happens to the price when the supply of a product increases due to entry of new firms?

Accepted Answer

Price falls

Chap 12.2 - Firms in Perfectly Competitive Markets: Short-Run and Long-Run Decisions

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